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Sunday, September 14, 2008

What does it take to make a land market work?

Writing in Hindustan Times, Gautam Chikermane ruminates on the legal dimensions of India's eminent domain crisis. You might like to see two blog posts on this in the past: link, link.

I feel that the lack of property as a fundamental right in the Indian constitution is a key flaw in our situation. Power corrupts, and it is not surprising that the State has abused this power. But if we go one step further and think: Suppose property was made a fundamental right in the Constitution, does this get the job done? Why is it that one can landup in the US and buy 2000 acres of land while it's hard to do this in Maharashtra? What else is required by way of making a land market work, other than strengthening the property rights of citizens? And in a well functioning land market, what is the appropriate `eminent domain' mechanism that should exist?

Ajay - Hernando De Soto has done groundbreaking and seminal work in this area (in my irrelevant opinion, Nobel worthy work). I am sure you and the erudite readers of your blog are aware of his work.

The right to property enshrined in the constitution does not mean much if there is no case law built around it as to how courts interpret the law. There is still eminent domain - but it has to be limited - national defence - yeah, post office - no or yes?.

If someone is sitting on a parcel of land that is desirable from an industrial perspective - then tough. Can we live with that? Can we - Tata, CPM - live with the idea that someone does _NOT_ want to sell them their 1 acre of land which is right in the middle of their project. No price is the right price. Rights bring responsibilities. I think in hindsight, Mamta Banerjee's efforts, inspite of her odious motivations, will bring about a sea-change in property rights in India. I hope

Here's an idea - some sort of auction market for these this projects should develop. The developer will go to an whole communities and say we desire to acquire these _contigious_ acres of land say - 400. But we will only buy if everyone is willing to sell - and the whole thing happens online - some variant of a dutch auction. But the auction is only valid if everyone tenders. If there is even one holdout the transaction is void. This will bring social pressure upon the holdout landowners - but it requires that titles are clear and on record and electronic. Which brings us back to DeSoto :)

There can be variants - the developer can invite a bigger number of land owners - say those owning 1000 acres but stop the auction the moment they have some contigious parcel - 300. This will prevent some of the holdout profiteering that goes on now.

There are sensible and free market solutions to a lot of these problems. In India's qausi capitalist system - they probably won't work.

On this historic day, with financial markets the world over demonstrating their tremendous reserves in the face of crisis, lets list all those other essential lubricants for a vibrant land market:

a) Oodles of ready cash from domestic banks and other financial institutions susceptible to political pressures & cronyism, besides their own greed and ignorance;

b) Fungible capital from all over the globe

c) A compliant regulator of markets raised on Ayn Rand

d) Enough and "liquid" markets in all manner of risk-transfer instruments (derivatives)

e) Eager masses of the young equipped with FRMs, CFAs, MBAs, etc who have an "education" in finance(i.e. are brainwashed into believing so);

f) Economists - especially financial economists - who don't think they understand the (arguably fragile) theoretical links between the pricing of risk and equilibrium, because they were schooled in the Friedman-Lucas-Kydland-prescott-Cochrane tradition of rational expectations.

I think we can safely dismiss ambiguities that arise from the legal protection of property rights when we have a "working market" that will eventually make a mockery of it.

"f) Economists - especially financial economists - who THINK they understand the (arguably fragile) theoretical links between the pricing of risk and equilibrium, because they were schooled in the Friedman-Lucas-Kydland-prescott-Cochrane tradition of rational expectations.

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